Bitcoin Basics for Enterprising Investors

If you’ve been paying attention to the financial news lately, then you’d have undoubtedly heard of the bitcoin and how it has, to some extent, taken the financial world by storm. Just when marquee blue chippers like Google and financial cinderellas like Netflix caught the attention of many by posting impressive gains in 2013, a few of the more eagle-eyed investors also turned the spotlight on bitcoins and bitcoin-based investments.

For a currency that was only minted in 2009 and one that doesn’t have the backing of any physical central bank or financial institution, that attention is nothing short of miraculous.

So what is the bitcoin and what does it have to offer to enterprising investors? Let’s look at the basics so you can assess if you belong to the group of eagle-eyed financial maestros who are ticking off the “add bitcoin to my investment portfolio” box in their New Year’s resolutions.

What is Bitcoin?

We already mentioned that the bitcoin is a newly minted currency, one that only came to existence in 2009. In fact, bitcoin is a virtual currency. While there are printed bitcoin paper currencies and physical coins, the true value of the bitcoin only lies in cyberspace where every single transaction is validated and encoded by a complex computer program designed to ensure the integrity of the bitcoin currency.

That brings us to one basic question regarding bitcoins: how does it differ with fiat money? More specifically, does the difference with fiat money make bitcoins a questionable investment?

In current terms, fiat money is defined as money that is declared by a government to be legal tender. The part that talks about the government is important because it underscores the very idea behind legal tender: that it is guaranteed by a reputable financial institution with a recognized and unquestionable authority. Central banks often play this role and every country in the world has a recognized central bank that guarantees the value of its own currency.

In the case of the bitcoin, there is no government to guarantee its integrity. There is, however, the block chain, that all important public database that catalogues all bitcoin transactions. The block chain validates bitcoins when it changes hands, updates the log information to reflect the real owner, and is configured such that the network is free from tampering.

The concept of the block chain is integral to the continuing strength of the bitcoin as a currency because it underscores the value of the integrity of assets as the driving force behind creating value. Without the block chain, there would be no way to track of all the bitcoins in existence, who owns them currently, and whether or not any subsequent transaction that is conducted is legitimate.

How to Get Your Hands on a Bitcoin

Naturally, the next question from an investor is how to get your hands on a few bitcoins. There are several ways of doing this. You can run a service or sell a product and accept bitcoins as payment. Virgin Galactic, a multimillion dollar corporation started doing this in November 2013. Other companies that accept bitcoins as payments also include Reddit and OkCupid.

The second way is to buy bitcoins. This is also known as bitcoin trading. It works just like any purchase that you make except that you do the purchase in the hopes that the bitcoin appreciates in value and you can turn a profit in a subsequent transaction. We’ll devote some time to talking about bitcoin trading towards the end of this article.

The third, and one that is quickly growing in popularity, is known as bitcoin mining. Because of the complexity of the block chain, it needs a lot of computing power to get the system going. Remember: every transaction is catalogued, validated, and logged creating a growing history of each and every bitcoin in existence.

The job of maintaining the block chain falls to what we now term as bitcoin miners. Miners are essentially computers that perform all the calculations required for the block chain to do what it’s supposed to do. One of the great things with the system is that it is decentralized and no one person has complete control over the block chain. With so many miners doing work to keep the block chain updated, the security of the system remains sound and viable.
Of course, computing power doesn’t come cheap and this is where the “mining” analogy becomes true. In exchange for the computing resources allocated to maintaining the block chain, the system pays back by releasing bit coins. Right now, approximately 1 bitcoin is released every 10 minutes and the system randomly determines which “miner” is awarded the bitcoin. From here, the mining analogy becomes more apparent.

It should also be remembered that anyone can mine bitcoins. Even a standard laptop or desktop computer can download an algorithm that hooks it up to the block chain so it can do the work. The caveat is that the likelihood of getting a bitcoin in return is proportional to the computing power input so a bank of computer servers is likely to win over a single laptop.

Why can trading bitcoins be a lucrative business?

Still, let’s suppose that you now own a few bitcoins from mining. What can you do with it?
Trading bitcoins is one very promising thing. The number of bitcoins that will ever be released is capped at 21 million and thus far, about 12 million are already in circulation. The finite nature of the currency makes it extremely valuable. As a result, the value of bitcoins fluctuates up and down like a stock.

Trading bitcoins essentially means buying or selling bitcoins at or close to the current value. At its core is the principle that you need to buy low and sell high. Right now, the price of bitcoins is $800 per 1 bitcoin. It appreciated as high as $1,200 in November 2013 and is expected to appreciate again as the fewer bitcoins remain unreleased.

Profiting from bitcoin trading essentially means taking advantage of these fluctuations. Consider; buying a bitcoin at $800 per and then selling it for $1,200 yields a 50% return in just a short period. Not many stocks and financial instruments give that kind of payback. That’s what makes bitcoin trading a very promising venture for enterprising investors.

Where to trade bitcoin CFDs?

There are several websites that offer bitcoin commodities trading. The idea is very simple: you can buy or sell actual bitcoins depending on the prevailing bitcoin prices at any given point. Naturally, the prices fluctuate so scoring a purchase at a lower price and then selling them at a higher value is the whole driving force behind the whole transaction.

There are not that many brokers where you can trade Bitcoin CFDs easily but Plus500 does a very good job here. It’s one of the largest brokers and one you can trust. So you should not look any further and maybe end up with a broker that is not reliable and just riding the Bitcoin wave.

Conclusion

As fewer and fewer bitcoins get released, the race for the newest digital currency is sure to intensify. With it, there is promise for price appreciation which can drive trading and investments.
Don’t get left behind by not jumping on the bitcoin bandwagon to see how you can take advantage of the revolution. It doesn’t take much; research, some level of internet savvy, and attention to detail is all that you need to succeed at bitcoin trading. Do that and you should be able to see decent rewards by investing in bitcoins.

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